US yields heading higher with the 2-year on course for 1.00%

US yields are going to be the main focus in markets this week with the Federal Reserve a host of other central banks including the European Central Bank, Bank of England and Bank of Japan, which are holding policy meetings this week.

We had a glimpse of what might come on a hawkish outcome from the Fed today in data released Tuesday. The producer-price index climbed 0.8% in November, signalling that US inflation is likely to remain high well into 2022. Then, with the shocking +9.6Y YoY, US yields bounced with the report easily exceeding expectations and marking the biggest advance since a major change in the index in 2009.

US Nov PPI  helped USD/JPY to move higher along with the two and 10-year Treasury yields posting their biggest gains in about a week. The 2-year government bond yields rose from 0.64% to 0.66%, and the 10-year government bond yields rose from 1.42% to 1.44%.

Fed policymakers are expected on Wednesday to announce they will accelerate a winddown of monthly bond purchases in response to inflation that continues to run hot. 

The statement and quarterly forecasts will be followed 30 minutes later by Chair Powell’s press conference.

''The Fed is expected to keep the funds rate at 0-0.25% but to double the pace of the reduction in the pace of bond purchases to finish the process in March 2022 i.e. reducing it by $30bn per month,'' analysts at Westpac explained. ''In the quarterly projections, the 2022 funds rate is likely to indicate at least 2 rate hikes, while inflation forecasts will be raised once again, GDP lowered but unemployment should also be seen a little lower.''

US 2-year yield, daily chart

The 2-year yield is making its way higher towards 1.00% on hawkish outlook for the Fed.